Regulation by litigation

By Felix Salmon
May 14, 2010
Nelson Schwartz and Eric Dash win the Cryptic Anonymous Quote award for the kicker to their story on a possible Wall Street settlement which would include, essentially, everyone:

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Nelson Schwartz and Eric Dash win the Cryptic Anonymous Quote award for the kicker to their story on a possible Wall Street settlement which would include, essentially, everyone:

Even some Wall Street executives concede that all the scrutiny makes proprietary trading a bit dubious. “The 20 guys in the room with the shades drawn are toast,” one senior executive of a major bank said.

There are three degrees of anonymity here: the 20 guys are anonymous, of course, if not downright apocryphal; the executive is anonymous too; and the executive’s employer is anonymous as well. And all this secrecy is in service of a quote which means pretty much whatever you want it to mean.

Still there’s substance in the rest of the story:

Legal experts are already starting to handicap potential outcomes, not only for Goldman but for the broader industry as well. Many suggest that Wall Street banks may seek a global settlement akin to the 2002 agreement related to stock research. Indeed, Wall Street executives are already discussing among themselves what the broad contours of such a settlement might look like…

As part of the 2002 settlement, 10 banks paid $1.4 billion total and pledged to change the way their analysts and investment bankers interacted to prevent conflicts of interests. This time, the price of any settlement would probably be higher and also come with a series of structural reforms.

I like the idea of structural reforms, since these reforms would presumably be over and above anything mandated by Congress. That’s one reason no settlement will come unless and until a financial regulation bill is signed into law: no regulator will agree to a deal in which banks agree to be bound by rules they’re going to end up bound by in any case.

On the other hand, if there are gaps and loopholes in the final legislation, a global settlement might well be the best way of closing them. Call it regulation by litigation: it can be quite effective, if practiced strategically. But is Mary Schapiro up to the task? I have to admit I have my doubts.

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